Socrates Demystifies the Social Security Decision

The Greek philosopher, Socrates, left no known writings. Only secondary sources exist for historians to piece together a recount of his work and teachings. The Platonic dialogues – roughly 30 dialogues written by Socrates’ student, Plato – provide the source for much of what we know about Socrates. The dialogues generally involve Socrates as the main character interrogating other characters to demonstrate the inconsistency or contradictions of the secondary character’s views – a version of what we refer to today as the Socratic method.

Plato’s Republic is the most famous of the Platonic dialogues. In the 10 books of Republic, Socrates questions Plato’s brother, Glaucon, tackling topics such as the definition of justice, the best forms of government, how justice can be accomplished within a state, and whether the just man is happier than the unjust man.

This Astute Angle post pays homage to the Socratic method, to Glaucon, and to Platonic dialogue in tackling one of the most debated topics of retirement finance. Think of the following as the long-lost 11th book of Plato’s Republic.

Glaucon: I don’t know that we’re getting anywhere in clarifying the ideal role of justice here in Athens. And these cave metaphors – or as you refer to them, allegories – are just utterly confusing.

Socrates: I think we are getting somewhere but I will satisfy your desire to change topics. Do you have insurance on your abode?

Glaucon: You didn’t waste any time in going in a completely different direction. Yes, of course I have home insurance.

Socrates: Now tell me: why do you have this insurance on your home?

Glaucon: For financial protection in case there is a fire or a tornado or some other event that exposes my home to a large loss.

Socrates: Have you had this home insurance for all your life?

Glaucon: Well, yes, since I first purchased a home back in 415 BC.

Socrates: And how much do you pay annually for this insurance?

Glaucon: Around 2,000 drachma each year.

Socrates: Had you forgone this insurance, you would have saved tens of thousands of drachma over your lifetime. Do you feel that you lost to the insurance company to which you paid the premiums for all these years?

Glaucon: Not at all. The insurance provides me with financial protection.

Socrates: If you live the remainder of your life without a fire burning down your home or a tornado tearing your home apart, will you suffer any regret paying for home insurance for all those years that provided no financial benefit to you?

Glaucon: No. I’ve never regretted paying these premiums and don’t anticipate that I would regret paying those premiums in the future.

Socrates: And do you ever hope for a natural disaster to destroy your home and all your personal belongings so that you can “win” against the insurance company?

Glaucon: Of course not. Who thinks that way?

Socrates: I’m getting there. But let’s shift gears for a moment and talk about a financial decision that you face in the immediate future. You turn 62 years old next month, correct?

Glaucon: Yes, I’m not sure whether I should be cheerful or melancholy about it.

Socrates: As they say, reaching age 62 is better than the alternative. The word in the market is that you proudly plan to claim Social Security benefits immediately upon celebrating your 62nd birthday.

Glaucon: That is correct. I’m getting those benefits as soon as I can.

Socrates: Why the rush?

Glaucon: Because I’ve paid in for all these years and it’s time for old Glaucon to get paid back.

Socrates: But I trust you appreciate that deferring benefits means getting back more in the future. Do you appreciate that if you defer to age 70, you will get 175% greater benefits plus any additions for cost of living adjustments.

Glaucon: Yes, I have studied that and done all the mathematics on my tablet. But what if I don’t live to 70 and never get a dime from all the money I’ve paid in? How big a mistake would that be?

Socrates: You tell me how bad it would be. Just a few minutes ago, you indicated that you would have no regrets about paying a lifetime of home insurance premiums even if you never received a dime of benefits. I’m not sure I see the difference here.

Glaucon: Well, I paid in all those years and I’d get nothing back.

Socrates: Just like with the insurance premiums that you said you don’t regret and won’t regret in the future.

Glaucon: OK, Mister Legendary Greek Philosopher, one big difference is that this is a calculated decision. I would have to live another 20 years – to age 82 – for deferring benefits to be financially beneficial. And if I die in the next 20 years, I lose.

Socrates: Lose what and to whom?

Glaucon: I lose by deferring Social Security benefits relative to what I would received had I just started benefits next month when I turn 62.

Socrates: I think what you’re insinuating is that if you defer benefits to 70 and then die before age 82, that you “lose” because the Greek Treasury is better off versus the alternative scenario where you claimed immediately at 62.

Glaucon: Precisely.

Socrates: To be clear, you don’t feel a sense of loss to the insurance company when they keep all your premiums and return nothing to you over your lifetime but you expect to feel a loss when Treasury avoids paying more benefits because you’re dead.

Glaucon: Yes, it may sound foolish but that represents my attitude.

Socrates: Do you realize that the only way you’ll experience this regret you describe is if you die early? So, you won’t experience any regret when you’re alive as you’ll have to be dead to face any regret.

Glaucon: OK, fair point. But what about my surviving children…they’ll regret that I didn’t take Social Security earlier.

Socrates: Do you really believe that your children are going to think to themselves at your funeral, “Wow, what a mistake dad made by not claiming Social Security earlier?” Not to get morbid or insensitive but the best financial scenario for your children is that you don’t live a long life and, resultantly, don’t have time to spend more of your money.

Glaucon: I understand. But what about my wife? If I die early, she will regret that I didn’t claim benefits early and get more out of Social Security while I was alive.

Socrates: Actually, just the opposite. As long as she lives after you, her benefit will be dependent on how big or small your living benefit was. So by taking benefits early and reducing the size of your benefit, you actually reduce the size of her surviving benefit. If she lives a healthy life, she won’t regret that you waited until age 70 to claim benefits but she will regret if you took benefits early.

Glaucon: OK, let’s get back to the home insurance analogy because I think I can help you see how it’s different.

Socrates: Great, I’d love to hear.

Glaucon: I pay premiums to the home insurer and they provide me with the security and peace of mind that I am protected. So even if I go my entire life without filing a claim or getting a dime from them, the added security is worth something, right?

Socrates: Absolutely true. But while we’re on the topic of insurance, let’s talk about the biggest financial risks that you will face over the remainder of your retired life. Do you have a sense for what those are?

Glaucon: Sure. I could get sued. The Greek stock market could take a sharp dive. My house could be destroyed by a disaster. I could incur significant medical costs. I could outlive my assets.

Socrates: That is a great list. And you have insurance for most of these risks, right?

Glaucon: Yes, all are insured save the risks of the stock market dive and outliving my assets.

Socrates: Do you realize that you could insure those risks for a relatively inexpensive premium?

Glaucon: How so?

Socrates: By deferring Social Security benefits as long as possible.

Glaucon: I don’t follow.

Socrates: Arguably, the best way to insure against sharp stock market declines and longevity is to take some of your assets and purchase an inflation-adjusted annuity that pays you income for life. You transfer the risk of investment losses and you hedge the risk of longevity by pooling that risk. Deferring Social Security is effectively buying a bigger inflation-adjusted annuity. The premium in your case would be the foregone benefits between age 62 and age 70 and the annuity payout is the higher benefits you would receive from 70 through the rest of your life.

Glaucon: So are you suggesting that Social Security is longevity insurance?

Socrates: Precisely. Notably, you didn’t say that living until 68 would be a financial risk. Because it’s not. If you die at age 68, you’re not going to outlive your assets. But if you live to 98, now you potentially bring in the risk of outliving your assets and you have a financial risk to be concerned about. The longer you live, the more important Social Security becomes to your finances. And the more helpful that a larger benefit becomes. So yes, deferring benefits as long as possible to get a higher benefit for the remainder of your life is an effective form of longevity insurance. In fact, it is perhaps the most effective form of longevity insurance.

Glaucon: Your points are well made. I get the sense that I’m not going to win this argument.

Socrates: I welcome your challenges and I don’t intend to be dismissive. I agree that you may “lose” by deferring Social Security benefits until age 70 but I think your definition of losing is ill-founded. If you fairly hold to this definition of losing, then the rational consequence is that you have no insurance of any kind. No health insurance. No auto insurance. No home insurance. However, you argued that insurance is valuable even if it entails paying premiums that you may never get back. I concur. And the rational conclusion from this argument is that deferring Social Security to age 70 is valuable because it provides useful insurance, even if you end up dying sooner than you expected.

Glaucon: You win. Let’s go back to these chained up people in the cave with the fire and the shadows…

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Jason Lina is a Partner, Lead Advisor, and Chief Investment Officer at Resource Planning Group where he advises clients in financial planning matters covering investments, taxes, estate planning, retirement planning, personal finance, education planning, and insurance. He is a Chartered Financial Analyst (CFA) charterholder and a CERTIFIED FINANCIAL PLANNER™ (CFP) with over 18 years of professional experience in the financial services industry.
Jason earned his MBA from the Tuck School of Business at Dartmouth College, and received his undergraduate degree (BA, History) from Davidson College where he was captain of the golf team and a first-team Academic All-American.
You can find Jason's personal biography and contact information here.